Caesars - Short Or Buy Puts Before Chapter 11 And The "Institutional Dump"

| About: Caesars Entertainment (CZR)
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Summary

Caesars is headed to Chapter 11 under the Singer plan or the Caesars plan.

Approximately 58% of the shares are held by institutions.

Fundamental measures are horrible and include a negative book value of ~$28 per share and $23B in debt.

Second lien notes are trading below 20 cents on the dollar and 37% of the float is already short.

While all Chapter 11 fact patterns are different, if you want to initiate some form of short position in Caesars, do not wait for the Chapter 11 announcement.

Disclosure: The author has taken a position in some March 2015 puts (at-the-money) and may buy additional puts or take short positions for reasons stated in this article.

A December 12, 2014, Seeking Alpha article has drawn some critical comments. Suggesting that Caesars Entertainment Corporation (NASDAQ: CZR) should be trading between $16 and $60 per share, the article was posted immediately prior to the market open, at $14 per share, and the stock collapsed on that very trading day. The stock continues to drift down.

Some comments suggest Caesars stock price will drop to zero, but it is quite possible that the parent may have effectively insulated itself from the debt on the operating company's books. Still, with 58% institutional ownership, bad news may trigger an "institutional dump."

Background

Generally, Singer wants an early entry to Chapter 11; Caesars wants a pre-packaged bankruptcy later entry to Chapter 11. There have been some bumps along the road to Chapter 11 and Caesars failure to put the deal together should drop the price-per-share and benefit shorts.

In late November, 2014, the New York Post reported:

Singer's Elliott Management is behind a lawsuit filed this week against Apollo's Caesars Entertainment that asks a judge to put the casino operator into Chapter 11 bankruptcy. Elliott…owns a large credit-default position in a Caesars division…Singer's CDS expires Dec. 19… Singer stands to make a fortune if Caesars enters Chapter 11 before Dec. 19.

On December 15, 2014, Bloomberg reported:

Caesars and a group of first-lien bondholders are nearing the conclusion of negotiations to put the operating company into a Delaware bankruptcy court by Jan. 15…(t)he new company would emerge from Chapter 11 proceedings as a real estate investment trust. The larger portion of the second lien notes, comprising $3.61 billion, last changed hands at 17 cents on the dollar on Dec. 12, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond climbed from a record low of 12.3 cents on Nov. 26, when Elliott was said to back a trustee lawsuit against Caesars. The smaller piece traded at 12.8 cents on the dollar on Dec. 5, according to Trace.

Fundamentals - A Face That Only a Mother Could Love

With $23B in debt, a Form 8-K filing announcing delay in making interest payments, and net losses, the positive working capital position is the only positive that shorts need be concerned with:

Source: Yahoo!Finance (selected measures):

Balance Sheet

Total Debt (mrq):

23.07B

Current Ratio (mrq):

1.49

Book Value Per Share (mrq):

-27.81

Share Statistics

Shares Outstanding:

144.36M

Float:

42.78M

% Held by Institutions:

57.80%

Shares Short (as of Nov 28, 2014):

18.02M

Short % of Float (as of Nov 28, 2014):

37.00%

NASDAQ puts institutional ownership at 71%. More is better, but either measure should be sufficient: YF at 58% or NASDAQ at 71%? Both are poised at significant levels and right where the shorts want them.

Place Your Bets - GTATQ: An Example of a Recent "Institutional Dump"

Those short on Caesars would find an institution dump to be very profitable. While a different fact pattern, the GT Advanced Technologies (OTCPK:GTATQ) Chapter 11 announcement provides an example of what happens to the stock price. The bankruptcy announcement was on October 6, 2014…focus on the volume, first, and the changes in the price per share, second. GTATQ Institutional ownership as of September 30, immediately prior to the October 6, Chapter 11 announcement was approximately 83% of 138M shares outstanding:

Source: Yahoo!Finance:

Date

Open

High

Low

Close

Volume

Oct 10, 2014

1.00

1.09

0.76

0.81

71,265,900

Oct 9, 2014

1.15

1.36

1.03

1.29

85,983,600

Oct 8, 2014

1.67

1.97

1.03

1.10

205,801,000

Oct 7, 2014

0.95

2.00

0.88

1.21

309,023,700

Oct 6, 2014

11.06

11.07

0.75

0.80

183,290,800

Oct 3, 2014

11.21

11.27

10.85

11.05

7,269,200

Oct 2, 2014

10.24

11.38

9.70

11.18

19,680,500

Oct 1, 2014

10.83

10.88

10.00

10.34

16,904,500

Sep 30, 2014

11.19

11.34

10.65

10.83

12,688,600

A move from a close of $11.05 per share to $1.10 per share is, precisely, what shorts want to see for the Caesars Chapter 11, and is made possible in the case of the "institutional dump."

No More Bets, Please - After the "Institutional Dump," Trading Profits Decline

Using the GTATQ example above, note that once the bad news hits, it is too late to go short for the most significant portion of the carnage. The time to buy puts, if you believe that the Caesars deal will not be put together, is now. I like March 2015, but you could opt for a shorter fuse and smaller premium, keeping the event dates, as addressed above, in mind (i.e., December 19, 2014 and January 15, 2015).

A Final Consideration

There's a significant decrease in the institutional ownership for these stocks, limiting the availability of shares that can be lent to short-sellers (who borrow the stock and sell it, hoping to buy it back again at a lower price). After filing, more than 90 percent of the investors are individual investors. Investing in Chapter 11 stocks: Trading, Value, and Performance

Disclosure: The author is short CZR.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.